Thursday, March 14, 2013

Using Mental Support & Resistance to Trade $GOOG and $VMW

Mental supports are almost always round numbers, $1, $5, $10, $50, and $100 increments depending on the price of the stock. When day trading, mental resistance/support can be a huge edge. When a stock breaks through a mental support it usually rallies. When it breaks mental support, it usually does so in a big way. This was particularly useful today in trading $VMW. In this 5 minute chart the mental resistance points of $84 and $85 are drawn. Notice the firm rejection on the first attempt to cross through $84. It then regrouped and shot through a couple of hours later, never looking back. At the time this was written $VMW had been thoroughly rejected at $85 as well, but was regrouping to spring through $85.

Another interesting way to look at mental support is in comparison with Fibonacci retracements. In this daily $GOOG chart we can see the Fibonacci retracements that worked as support and resistance, as they should have. But as you can also tell, mental supports overrode Fibonacci in a couple of areas. The first is the $750 area. When $GOOG broke down after a terrible earnings report the 38.2% fib line didn't act as support/resistance, the mental support of $650 did. This is also observed at $775. The Fibonacci sequence is found throughout the entire universe and exceptions are rare. Mental support and resistance areas are one of those rare exceptions.